## CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY ## Source details **Canonical URL:** [CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY](https://www.imf.org/-/media/files/publications/gfsr/2021/april/english/ch2.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfsr/2021/april/english/ch2.pdf.md) - [Structured JSON version](/-/media/files/publications/gfsr/2021/april/english/ch2.pdf.json) --- ### Chapter 2 — Key findings (at a glance) - Leverage in the nonfinancial private sector reached historical highs for many economies in the run-up to the COVID-19 crisis. - Nonfinancial sector debt worldwide increased from 138 percent to 152 percent of GDP over the decade leading up to the end of 2019. - Nonfinancial corporate sector debt reached a historical high of 91 percent of GDP at the end of 2019. - Household debt reached 60 percent worldwide at the end of 2019, rising sharply in emerging market economies and falling in advanced economies as a group. - Global nonfinancial corporate and household debt increased by 11½ percentage points and 5 percentage points of GDP, respectively, between the end of 2019 and the third quarter of 2020. - Loose financial conditions since the global financial crisis were a predominant driver of rising leverage. - The COVID-19 shock further increased leverage by squeezing corporate cash flows and increasing household financing needs; unprecedented monetary and fiscal support eased market dysfunction and maintained the flow of credit. - Periods of rapid or high nonfinancial sector leverage have often preceded financial and economic downturns. ### Drivers and mechanisms - Highly accommodative monetary policies and eased financial conditions after the global financial crisis facilitated the rise in nonfinancial sector debt. - The pandemic’s containment phase involved unprecedented monetary and fiscal policy support that loosened financial conditions after a sharp tightening in Q1 2020 and supported credit flows to households and firms. - Policy support enhanced borrowers’ ability to repay, preventing liquidity pressures from morphing into solvency issues, but at the expense of increased debt levels. - Easy financial conditions are associated with substantial buildups in leverage over the subsequent 12 months in both advanced and emerging market economies. - Stronger buildups in leverage tend to be followed by more subdued economic activity over the subsequent 12 quarters. ### Empirical findings: financial conditions → leverage (quantified) - Financial conditions are measured by the Financial Conditions Index (FCI); for analysis the negative of the FCI is used so that higher values indicate looser financial conditions. - Key quantified associations: - A one-unit loosening of financial conditions is followed by an increase in nonfinancial corporate debt by 4 percentage points of GDP over three years. - A one-unit loosening of financial conditions implies an increase in household leverage by 1½ percentage points of GDP over a three-year horizon. - Nonlinearities and amplifications: - The increase in leverage in response to financial conditions is nonlinear: an easing of financial conditions during a credit boom is followed by a larger increase in leverage than in periods without a boom. - “Credit boom” is defined as a binary variable equal to one if the country-specific FCI is in the bottom half of its distribution and the eight-quarter change in the nonfinancial private sector credit-to-GDP ratio is in the top three deciles of its distribution. - There is evidence of a stronger association with easing financial conditions when the initial level of leverage is high (top three deciles of the debt-to-GDP distribution), particularly for household leverage. - Robustness: - Results are broadly similar across advanced and emerging market economies, though nonfinancial corporate leverage reacts more strongly in emerging markets. - Results are robust to specifications purging macroeconomic factors from the FCI, using global FCI or VIX, panel VAR estimation, removing cyclical components, and controlling for fiscal variables. - Using growth in inflation-adjusted debt yields qualitatively similar results (changes in debt-to-GDP may reflect GDP fluctuations as well as debt changes). ### Macro-financial stability implications (growth-at-risk analysis) - Approach: growth-at-risk (GaR) focusing on the 10th percentile (lower tail) of future real GDP growth (year over year). - Short-term vs. medium-term effects of looser financial conditions: - A one-unit loosening of financial conditions is associated with an increase in the 10th percentile of real GDP growth in the near term—amounting to a reduction in downside risk—by 1½ percentage points. - After the seventh quarter, the near-term boost vanishes and the downside risk increases by about 1 percentage point. - Alternative quantified statement in the chapter: - A one-unit loosening in the Financial Conditions Index (FCI) is associated with a reduction in near-term downside risk by 2.5 percentage points, and an increase in downside risk by 3.3 percentage points after two years. - Leverage accelerations and downside risk: - A 10 percentage point acceleration in nonfinancial corporate leverage buildup is associated with an increase in downside risks of about 1 percentage point in the near term. - Acceleration in household leverage has a similar association with downside risk, with statistical significance either in the near term or after 10 quarters. - Heterogeneity: - The effect of nonfinancial corporate leverage on downside risks stems mainly from emerging markets, with downside risks increasing significantly by about 2 percentage points in the medium term following a 10 percentage-point buildup in leverage. - The adverse impact of household leverage on longer-term growth is more robust for advanced economies. - Net implication: easy financial conditions imply an intertemporal trade-off—boosting short-term growth while increasing medium-term downside risk via leverage buildups and amplified nonlinearities during shocks. ### Macroprudential policy actions: historical patterns and estimated effects - Historical pattern: - Macroprudential policy tightening became more frequent after the global financial crisis and leading up to the COVID-19 crisis. - Measures related to bank capital and liquidity were tightened most often. - Measures related to banks’ foreign currency exposure are more prevalent in emerging markets than in advanced economies. - Estimated effects (one-unit net tightening in the category): - Borrower-based measures (e.g., household LTV or DSTI ceilings) are followed by a reduction in the household debt-to-GDP ratio by up to 1 percentage point over a two-year horizon. - Net tightening of banks’ liquidity requirements is associated with a reduction in corporate leverage by up to 1 percentage point of GDP over a two-year horizon. - Net tightening of foreign-exchange-related measures for banks in emerging markets is followed by a decline in nonfinancial corporate leverage of about 2½ percentage points over three years. - Aggregate macroprudential impact: - A net tightening across categories is associated with a significantly lower downside risk to future growth by about half a percentage point. - Interaction with financial conditions: - When a loosening of financial conditions coincides with macroprudential tightening, the intertemporal trade-off is almost entirely mitigated. ### Policy implications, timing, and calibration - Core policy challenge: - Policymakers face an intertemporal trade-off: easing financial conditions supports near-term growth but can exacerbate leverage buildups and increase downside risks to future economic activity. - Continued extraordinary policy support once recovery takes hold risks adding to already elevated leverage vulnerabilities and could induce excessive risk taking due to moral hazard. - Recommended actions: - Policymakers should be mindful of financial stability risks stemming from high leverage in the post–COVID-19 environment and stand ready to tighten macroprudential policies as the recovery takes hold. - Targeted macroprudential policies that “lean against the wind” (mitigate the adverse effects of loose financial conditions) can contain or reverse leverage buildups and improve the intertemporal trade-off, reducing risks to future financial stability. - The timing for deploying macroprudential tools should be country-specific and depend on the pace of recovery, postcrisis vulnerabilities, and the policy toolkit available. - Given possible lags between activation and full impact, policymakers should take early action to tighten selected macroprudential tools to address rising financial vulnerabilities. - Fiscal measures can influence leverage: - Grants to households or subsidies to firms can reduce financing needs and dampen leverage buildups. - Measures such as loan guarantee programs, favorable tax treatment of interest expenses, and accelerated depreciation could incentivize nonfinancial sector borrowing. - Public spending can both “crowd out” private borrowing by raising interest rates and “crowd in” private borrowing if it stimulates aggregate demand during recessions. - Implementation caveats: - The timing and calibration of macroprudential tightening must be economy-specific, reflecting divergence in pace of recovery across and within economies and sectors. - Policymakers should account for implementation lags and act early when vulnerabilities are rising. ### Nonbank financial intermediation (NBFI) and leakages - Increased reliance on macroprudential policy raises urgency to limit potential leakages as finance migrates away from banks to NBFIs. - Urgent efforts are needed to develop a macroprudential toolkit for the nonbank financial sector. - Examples and country experience: - Claessens and others (2021) show cross-country evidence that macroprudential tightening increases NBFI activities and spills over across borders. - Korea extended limits on household lending at high debt service ratios to some NBFIs and applied policy measures to contain foreign exchange risks to some NBFIs (IMF 2020). - In economies where recovery has gained momentum (such as China and New Zealand), macroprudential measures pertaining to the real estate sector have been tightened in recent months. - Given challenges in designing and operationalizing macroprudential tools within existing frameworks, policymakers should consider whether buffers need to be built elsewhere to protect the financial system. ### Empirical sample and methodology notes - Global nonfinancial sector debt-to-GDP ratios are computed from 52 economies reporting to the Institute of International Finance, with aggregate ratios measured as the sum of debt for those economies divided by the sum of GDP for those economies (both in US dollars). - The chapter’s formal econometric analysis draws on data from the past three decades for a sample of 29 economies (19 advanced economies and 10 emerging markets) over 1996:Q1 to 2020:Q3. - Financial conditions are measured by the Financial Conditions Index (FCI) used in Chapter 1; for the analyses shown, the negative of the FCI is used so that higher values indicate looser financial conditions. - Empirical relationships documented: - Loose financial conditions are associated with greater increases in corporate and household leverage over the following 12 quarters. - Periods of strong growth in corporate or household leverage are often followed by lower growth in output over the subsequent 12 quarters. *Source: CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY (April 2021).* ### Chapter 2 at a Glance ### Chapter 2 at a Glance ### Key findings - Leverage in the nonfinancial private sector reached historical highs for many economies in the run-up to the COVID-19 crisis. - Nonfinancial sector debt worldwide increased from 138 percent to 152 percent of GDP over the decade leading up to the end of 2019. - Nonfinancial corporate sector debt reached a historical high of 91 percent of GDP at the end of 2019. - Household debt reached 60 percent worldwide at the end of 2019, rising sharply in emerging market economies and falling in advanced economies as a group. - Global nonfinancial corporate and household debt increased by 11½ percentage points and 5 percentage points of GDP, respectively, between the end of 2019 and the third quarter of 2020. - Loose financial conditions since the global financial crisis were a predominant driver of rising leverage. - The COVID-19 shock further increased leverage by squeezing corporate cash flows and increasing household financing needs; unprecedented monetary and fiscal support eased market dysfunction and maintained the flow of credit. - Periods of rapid or high nonfinancial sector leverage have often preceded financial and economic downturns. ### Drivers and mechanisms - Highly accommodative monetary policies and eased financial conditions after the global financial crisis facilitated the rise in nonfinancial sector debt. - The pandemic’s containment phase involved unprecedented monetary and fiscal policy support that loosened financial conditions after a sharp tightening in Q1 2020 and supported credit flows to households and firms. - Policy support enhanced borrowers’ ability to repay, preventing liquidity pressures from morphing into solvency issues, but at the expense of increased debt levels. - Easy financial conditions are associated with substantial buildups in leverage over the subsequent 12 months in both advanced and emerging market economies. - Stronger buildups in leverage tend to be followed by more subdued economic activity over the subsequent 12 quarters. ### Risks and intertemporal trade-offs - Policymakers face a trade-off: easing financial conditions supports near-term growth but can exacerbate leverage buildups and increase downside risks to future economic activity. - Continued extraordinary policy support once recovery takes hold risks adding to already elevated leverage vulnerabilities and could induce excessive risk taking due to moral hazard. - The intertemporal trade-off may be amplified by existing high and rapidly building leverage, especially if new credit is allocated to riskier borrowers. - The rising role of the nonbank financial sector in providing financing to the nonfinancial sector increases the urgency of developing macroprudential tools for this sector. ### Policy recommendations - Policymakers should be mindful of financial stability risks stemming from high leverage in the post–COVID-19 environment and stand ready to tighten macroprudential policies as the recovery takes hold. - Targeted macroprudential policies that “lean against the wind” (mitigate the adverse effects of loose financial conditions) can contain or reverse leverage buildups and improve the intertemporal trade-off, reducing risks to future financial stability. - The timing for deploying macroprudential tools should be country-specific and depend on the pace of recovery, postcrisis vulnerabilities, and the policy toolkit available. - Given possible lags between activation and full impact, policymakers should take early action to tighten selected macroprudential tools to address rising financial vulnerabilities. - Urgent efforts are needed to develop a macroprudential toolkit for the nonbank financial sector. - Policymakers should consider whether buffers need to be built elsewhere to protect the financial system, given challenges in designing and operationalizing macroprudential tools within existing frameworks. ### Empirical evidence and sample details - Global nonfinancial sector debt-to-GDP ratios are computed from 52 economies reporting to the Institute of International Finance, with aggregate ratios measured as the sum of debt for those economies divided by the sum of GDP for those economies (both in US dollars). - The chapter’s formal econometric analysis draws on data from the past three decades for a sample of 29 economies (19 advanced economies and 10 emerging markets). - Financial conditions are measured by the Financial Conditions Index (FCI) used in Chapter 1; for the analyses shown, the negative of the FCI is used so that higher values indicate looser financial conditions. - Empirical relationships documented: - Loose financial conditions are associated with greater increases in corporate and household leverage over the following 12 quarters. - Periods of strong growth in corporate or household leverage are often followed by lower growth in output over the subsequent 12 quarters. *International Monetary Fund | April 2021 — Chapter 2 at a Glance, Global Financial Stability Report* ### CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY ### CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY ### Overview and purpose - The chapter adopts a forward-looking view to flag potential risks to macro-financial stability that may arise due to elevated leverage once the post–COVID-19 recovery is self-sustaining and broad policy support is no longer essential. - Analysis centers on interactions among financial conditions, nonfinancial sector leverage, and macro-financial stability, using a growth-at-risk (GaR) approach focused on downside forecasts of future economic activity (lower tail, 10th percentile). - The empirical sample covers 29 economies over 1996:Q1 to 2020:Q3 (list of economies provided in source). ### Conceptual framework - Financial conditions (reflecting the price of risk) are a key driver of leverage buildups: loose financial conditions increase intermediaries’ and markets’ incentive and capacity to take on risk and lend; they also increase borrowers’ incentive and capacity to borrow via higher asset values and net worth. - Macro-financial policies (monetary, macroprudential, fiscal) affect leverage buildups through financial conditions and through effects on income, unemployment, inflation, and debt service costs. - Macroprudential policies can “lean against the wind” by tightening to lessen leverage buildups or by strengthening borrower and lender resilience. - Leverage and leverage growth can amplify adverse shocks through nonlinear interactions between tightened financial conditions and rapid deleveraging. ### Financial conditions and nonfinancial sector leverage — empirical findings - Controlling for other drivers, looser financial conditions are associated with increases in nonfinancial sector leverage in the near and medium term. - Key quantified associations: - A one-unit loosening of financial conditions is followed by an increase in nonfinancial corporate debt by 4 percentage points of GDP over three years. - A one-unit loosening of financial conditions implies an increase in household leverage by 1½ percentage points of GDP over a three-year horizon. - Nonlinearities: - The increase in leverage in response to financial conditions is nonlinear: an easing of financial conditions during a credit boom is followed by a larger increase in leverage than in periods without a boom. - “Credit boom” is defined as a binary variable equal to one if the country-specific FCI is in the bottom half of its distribution (a lower FCI represents looser financial conditions) and the eight-quarter change in the nonfinancial private sector credit-to-GDP ratio is in the top three deciles of its distribution. - There is evidence of a stronger association with easing financial conditions when the initial level of leverage is high (top three deciles of the debt-to-GDP distribution), particularly for household leverage. - Robustness and caveats: - Results are broadly similar across advanced and emerging market economies, though nonfinancial corporate leverage reacts more strongly in emerging markets. - Results are robust to specifications purging macroeconomic factors from the FCI, using global FCI or VIX, panel VAR estimation, and removing cyclical components; they are also robust to controlling for fiscal variables. - Changes in debt-to-GDP ratios may reflect fluctuations in GDP as well as changes in debt; using growth in inflation-adjusted debt yields qualitatively similar results. ### Macro-financial stability implications of leverage - The GaR/quantile local projection analysis focuses on the 10th percentile of future real GDP growth (year over year) to capture downside risk. - Short-term versus medium-term effects of looser financial conditions: - A one-unit loosening of financial conditions is associated with an increase in the 10th percentile of real GDP growth in the near term—amounting to a reduction in downside risk—by 1½ percentage points. - After the seventh quarter, the near-term boost vanishes and the downside risk increases by about 1 percentage point. - Heterogeneity: - Emerging market economies appear to experience faster and sharper economic downturns in the medium term compared with advanced economies, consistent with their stronger short-term leverage response to loosening financial conditions. - Implication: easy financial conditions imply an intertemporal trade-off—boosting short-term growth while increasing medium-term downside risk via leverage buildups and amplified nonlinearities during shocks. ### Policy implications and recommendations - Timely recognition of risks from elevated leverage can assist policymakers in planning a post-COVID exit and swiftly deploying tools to counter risks when economic conditions permit. - Macroprudential policies can be used to increase resilience and to lean against the wind by tightening to limit leverage buildups and strengthening borrower and lender balance sheets. - Fiscal measures can influence leverage: - Grants to households or subsidies to firms can reduce financing needs and dampen leverage buildups. - Measures such as loan guarantee programs, favorable tax treatment of interest expenses, and accelerated depreciation could incentivize nonfinancial sector borrowing. - Public spending can both “crowd out” private borrowing by raising interest rates and “crowd in” private borrowing if it stimulates aggregate demand during recessions. - Policymakers face an intertemporal trade-off: easing financial conditions supports short-term output but can raise medium-term downside risk—policy tools (macroprudential, fiscal, and monetary instruments) should be calibrated to balance immediate support with medium-term financial stability. *Source: CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY (IMF, April 2021).* ### CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY ### CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY ### Key empirical findings on financial conditions, leverage, and downside risk - A one-unit loosening in the Financial Conditions Index (FCI) is associated with: - a reduction in near-term downside risk by 2.5 percentage points, and - an increase in downside risk by 3.3 percentage points after two years. - The intertemporal trade-off (near-term boost vs. medium-term downside risk) is amplified during credit booms. - A 10 percentage point acceleration in nonfinancial corporate leverage buildup is associated with an increase in downside risks of about 1 percentage point in the near term. - Acceleration in household leverage has a similar association with downside risk, with statistical significance either in the near term or after 10 quarters out. - Looking across economies: - The effect of nonfinancial corporate leverage on downside risks stems mainly from emerging markets, with downside risks increasing significantly by about 2 percentage points in the medium term following a 10 percentage-point buildup in leverage. - The adverse impact of household leverage on longer-term growth is more robust for advanced economies. - These effects are more pronounced on the left tail (10th percentile) of the GDP growth distribution. ### Macroprudential policy actions and their measured effects on leverage - Historical pattern: - Macroprudential policy tightening became more frequent after the global financial crisis and leading up to the COVID-19 crisis. - Measures related to bank capital and liquidity were tightened most often. - Measures related to banks’ foreign currency exposure are more prevalent in emerging markets than in advanced economies. - Estimated effects of specific categories of macroprudential tightening (one-unit net tightening in the category): - Borrower-based measures (e.g., household LTV or DSTI ceilings) are followed by a reduction in the household debt-to-GDP ratio by up to 1 percentage point over a two-year horizon. - Net tightening of banks’ liquidity requirements is associated with a reduction in corporate leverage by up to 1 percentage point of GDP over a two-year horizon. - Net tightening of foreign-exchange-related measures for banks in emerging markets is followed by a decline in nonfinancial corporate leverage of about 2½ percentage points over three years. - When considering all macroprudential measures together: - A net tightening across categories is associated with a significantly lower downside risk to future growth by about half a percentage point. ### Macroprudential policy and the intertemporal trade-off - Macroprudential tools can be used to: - lean against the wind (temper or reverse leverage buildups), and - strengthen resilience (target borrowers or lenders). - When a loosening of financial conditions coincides with macroprudential tightening, the intertemporal trade-off is almost entirely mitigated. - Macroprudential policies play two roles: - Targeted tightening helps lean against leverage buildups, particularly during credit booms. - Overall tightening contributes to mitigating the intertemporal trade-off by reducing downside risk directly or counteracting risks from loose financial conditions when leverage has been growing rapidly. ### Conclusions and policy recommendations - Context: - In the decade after the global financial crisis, leverage increased steadily in the nonfinancial corporate and household sectors across many economies. - Global nonfinancial sector leverage reached a historically high level by the end of 2019, just before COVID-19. - Pandemic-related expansionary monetary policy eased financial conditions and supported the flow of credit; additional debt helped cushion pandemic effects. - Policy challenge: - Accommodative policy boosts short-term activity but can increase medium-term downside risk to growth as nonfinancial sector leverage rises. - Policy recommendations and implications: - Policymakers should stay attuned to emerging financial stability risks as the post-pandemic recovery takes hold. - Use macroprudential tools to mitigate the intertemporal trade-off: - Tightening measures targeted at borrower eligibility (LTV, DSTI) can slow household debt accumulation. - Tightening liquidity-related limits on banks can slow corporate leverage buildups. - Measures aimed at curbing foreign currency exposures of banks are effective in reining in nonfinancial corporate leverage in emerging markets. - When financial conditions are loosening, pairing accommodative monetary/fiscal support with macroprudential tightening can help limit future downside risks to growth. *Source: CHAPTER 2 NONFINANCIAL SECTOR: LOOSE FINANCIAL CONdITIONS, RISING LEVERAGE, ANd RISkS TO MACRO-FINANCIAL STABILITY (April 2021).* ### Chapter 1 and in the April 2021 Fiscal Monitor, main- ### Chapter 1 and in the April 2021 Fiscal Monitor, main- ### Near-term policy support and leverage risks - Maintaining adequate policy support to firms and households in the near term is crucial for economies where recovery has not yet taken hold, or remains fragile. - Policymakers need to remain vigilant to the risks of high leverage and be well aware of the need to reduce those risks. - Policy measures to address high leverage should include: - Well-designed policies to deal with highly indebted firms. - Greater supervisory attention to risk taking. - Swift implementation of macroprudential tightening as soon as macroeconomic conditions permit. ### Nonbank financial intermediation (NBFI) and macroprudential leakages - An increased reliance on macroprudential policy to mitigate financial stability risks underscores the need to limit potential leakages, which weaken the effectiveness of these tools as finance increasingly migrates away from banks to NBFIs. - Efforts should be made urgently to further develop the toolkit for non-bank financial intermediaries. - Given the challenges to designing and operationalizing macroprudential tools within existing frameworks, policymakers should consider the need to build buffers elsewhere to protect the financial system. ### Timing, calibration, and implementation lags for macroprudential tools - Adequate timing for deployment of macroprudential tools must be economy-specific, depending critically on: - The pace of recovery. - Postcrisis vulnerabilities. - The policy toolkit available to policymakers. - Given the expected divergence in the pace of recovery across economies, and within economies and sectors, policy actions will need to be well calibrated and designed according to the specific circumstances facing economies. - Policymakers should be mindful of the lags in implementation for macroprudential measures to take full effect, and thus should take early action to tighten selected tools to address rising vulnerabilities in the nonfinancial sector. - Examples and evidence noted in the source: - Claessens and others (2021) provide cross-country evidence that macroprudential tightening increases NBFI activities and spills over across borders. - Korea extended limits on household lending at high debt service ratios to some NBFIs and applied policy measures to contain foreign exchange risks to some NBFIs (IMF 2020). - In a few economies where recovery has gained momentum (such as China and New Zealand), macroprudential measures pertaining to the real estate sector have been tightened in recent months. - Further consideration on how and when to tighten macroprudential tools can draw on principles developed to guide IMF bilateral advice to member countries (IMF 2014). ### Policy recommendations (concise) - Maintain adequate near-term policy support for firms and households in fragile recoveries while actively managing leverage risks. - Design and implement policies for highly indebted firms and strengthen supervisory oversight of risk taking. - Implement macroprudential tightening promptly when macroeconomic conditions permit, accounting for implementation lags. - Urgently develop macroprudential toolkits tailored to NBFIs and limit leakages as finance migrates away from banks. - Consider building buffers outside traditional macroprudential frameworks where design and operationalization challenges exist. *Source: Chapter 2 excerpt from the April 2021 Global Financial Stability Report (text provided).* --- _Source: https://www.imf.org/-/media/files/publications/gfsr/2021/april/english/ch2.pdf_